IBM and Lenovo Fail to Reach Agreement Over Server Business Unit Transaction.

Negotiations between IBM and Lenovo group over a deal under which the latter would acquire mainstream server business unit from the former have ended with no results, according to a media report. The parties have not reached agreements over price and will unlikely resume, therefore IBM will continue to supply x86 servers in the foreseeable future, unless it finds a new buyer.

Last month it transpired that IBM was in advanced talks to sell its x86 server business unit to Lenovo Group. The exact terms of the deal were unclear, but it could easily worth from $2.5 billion to $6 billion of dollars as IBM is one of the leaders of the server market. According to Fortune magazine, the two companies have halted negotiations over valuation concerns and will unlikely resume the talks.

IBM has a history of belligerently shifting its business mix to areas with healthier progress and higher profit margins. The firm sold off its PC business to Lenovo in 2005 before personal computers had been largely commoditized. IBM then beefed up its operations in higher margin software and consulting businesses.

While selling-off mainstream server business will boost IBM’s margins, it also means that the company will have to leave the server market in the coming years as the market of proprietary mainframes, where IBM is also very strong, is shrinking. On the other hand, with the rise of micro-servers, IBM would face major challenges from companies like Dell, HP and others since the latter have numerous technology and benefit from volume-of-scale..

Even though IBM is considerably behind Dell and Hewlett-Packard in terms of volumes, it has very strong reputation among customers. Lenovo has so far initiated its own server business, but has not gained much of the market share.

IBM and Lenovo did not comment on the news-story, but Lenovo admitted in a filing with the Hong Kong stock exchange that it was in talks regarding a major acquisition.